Luke Sharrett/Bloomberg
America’s love of driving took a hit during the Covid-19 pandemic, but with the U.S. tiptoeing toward the end of the lockdowns, people will be driving more than they have in the past year, for work and for play.
stock should be one winner.
Driving didn’t go away completely during the pandemic, but it sure took a back seat. Americans drove 14% fewer miles during the 12 months ended in January 2021 than they did during the previous 12 months, as the need to travel for anything other than the essentials declined. And less driving means less wear-and-tear on cars—and fewer parts that need to be replaced.
Shares of O’Reilly Automotive (ticker: ORLY), the largest of the three major auto-part retailers, gained 46.3% during the past year, below the
48.2%, and has trailed rivals
(AZO) and
(AAP), as well.
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ut with Americans getting vaccinated and on the move again, O’Reilly should experience an uptick in its business—and catch up with its competitors. The company has used the downtime to improve its business and gain market share, while expanding its bricks-and-mortar footprint. That work should pay off in the months ahead as life continues to return to something like normal. Expect O’Reilly Automotive to profit.
It’s not that its business has dried up. In February, the company reported strong organic growth and record operating profitability, with sales growing 14%, to $11.6 billion, for fiscal 2020. The Springfield, Mo.–based company also added $1 billion to its share-repurchase plan concurrently with its fourth-quarter results—on top of a $1 billion authorization in the third quarter—and said that strong sales momentum continued quarter to date.
Yet the market didn’t react enthusiastically to O’Reilly’s guidance: The shares fell 5% after the company said it would earn from $22.70 to $22.90 a share in 2021, below forecasts of $23.30. Still, investors seemed to be overlooking the good news in the below-consensus guidance: “The short-term debate seems to miss the forest for the trees,” Credit Suisse analyst Seth Sigman argued after the report. “A recovery is coming, and O’Reilly is well positioned to benefit from that.”
While the company’s earnings-per-share forecast was below expectations, it represents a nearly 13% increase on a two-year compounded annual growth rate basis. Management said it expected “significant quarter-to-quarter uncertainty,” given the timing of the recovery; that could leave room for upside surprises, and at least suggest that some potential headwinds may be transitory.
O’Reilly isn’t sitting still, opening new stores at a healthy clip—167 in 2020—and expanding internationally, with a recent acquisition of Mexico-based auto parts retailer Mayasa in November 2019. “We believe they have aspirations to be more than just a predominately U.S. retailer,” says Ira Rothberg, portfolio co-manager at Hennessy Funds. He thinks O’Reilly can ultimately expand from about 5,600 stores in the U.S. to some 7,000, and ultimately rival AutoZone’s 600-store presence in Mexico.
That’s good not only for its bricks-and-mortar business, but also for fending off online competition from
(AMZN) and others. Having a large and expanding network of stores makes it easier for O’Reilly’s to get parts to customers as soon as possible. “Amazon can deliver quickly, but not as fast with hard-to-find parts,” says Zachary Dimmerman, associate portfolio manager at Centerstone Investors. “By having this retail footprint, it can quickly reach garages in 30 minutes or less.”
While the shares have done well, they still change hands at 21 times forward earnings, just slightly above its five-year average. After modest EPS growth in 2021, earnings are expected to jump 11.6% in 2022 to $26.37 on a 5.6% increase in sales. If it changed hands at 22 times that number—in line with historical levels—the shares would be worth $580, up 12% from a recent $517.69.
Longer term, analysts peg O’Reilly’s EPS growth at 10.5%, ahead of nearest rival AutoZone’s 10.2%. While the latter looks slightly cheaper, at 17 times forward earnings, O’Reilly’s return on assets and earnings before interest, taxes, depreciation, and amortization margins, at 14.8% and 23.6%, respectively, were higher last year than they’ve been on an historical basis.
In addition, analysts expect O’Reilly’s same-store sales to come in at about 3%, near the low end of the company’s 3% to 5% annual target from 2022 forward. If O’Reilly can hit the top end of that range, it would be another catalyst for the stock.
“O’Reilly understands what it takes to win with the professional mechanic,” says Rothberg. It can be a win for investors, too.
Write to Teresa Rivas at teresa.rivas@barrons.com
